Crypto Tax Reporting 101: A Guide to Reporting Transactions BEC: Accounting, Tax, CFO for Real Estate Investors

Due to their anonymity, cryptocurrencies may be used to conduct ILLEGAL activities. This makes it all the more important for bookkeepers to understand the basic ins and outs of accounting for cryptocurrency. After all, properly accounting for your Bitcoin or Ethereum transactions, or those of your clients, will save you a lot of time, money and hassle down the road. Increasingly embraced by the financial markets and investors, cryptocurrencies such as Bitcoin and Ethereum present a new set of challenges for bookkeepers and accountants. In order to accurately track your crypto-related transactions in a scalable way, you need a system deliberately built for crypto. SoftLedger is the first full-featured accounting system that supports crypto.

Calculating crypto taxes

For assets that lack clear market data, the onus is on the company to rigorously document its valuation methods. Auditors and regulators expect transparent, well-supported methodologies that can stand up to scrutiny, making thorough recordkeeping and policy development essential for every reporting entity. You also need to address the classification of different types of digital assets, such as stablecoins or utility tokens, which may have unique accounting implications. Some folks think that because crypto operates in a digital realm, it can moonwalk right past the taxman. But oh boy, that’s about as accurate as expecting your cat to fetch the morning paper.

Since 2014, we’ve helped everyone from casual traders to major coin developers report crypto taxes, lower their tax burden, and keep money in their (digital) wallets. Now I know staring down crypto taxes with their labyrinth of rules seems scarier than walkin’ past a haunted house at midnight. And manually tracking crypto accounting makes about as much sense as feeding pancakes to a pig.

Why It’s Never Too Early to Think About Your Career in Accounting

• Today, four key agencies oversee different aspects of the crypto space, such as the IRS, SEC, CFTC, and FinCEN, playing a pivotal role in regulating the digital assets for investors, traders, and developers.
• Rates vary based on the holding period—short-term gains are taxed at ordinary income rates, while long-term gains benefit from reduced rates.
• This means that financial firms can report the income or expense generated from their cryptocurrency, whether it’s been realized or not, and whether it’s a net loss or gain.
• As one of the early CPA firms to embrace the crypto industry, BPM has spent over 11 years developing deep knowledge and proven methodologies specifically for digital asset businesses.

Now let’s say the price of that 100 Bitcoin went down to $75, so you decide to sell it before you lose all your money. Bitwave offers enterprises a robust solution for handling digital assets, including complex tax tracking, automatic mark-to-market capabilities, crypto invoicing, and bill pay. The platform features a cryptocurrency accounting 101 multi-user, multi-sig wallet, ensuring businesses can securely and compliantly hold their cryptocurrencies.

Other well-known services include Cryptonator, CoinGate, and BitPay, the latter of which exclusively accepts Bitcoins. As with any other investment, you must pay close attention to the market value of cryptocurrencies as well as any related news. Coinmarketcap is a one-stop shop for tracking the price, volume, circulating supply, and market capitalization of most existing cryptocurrencies. However, while it may appear to be more handy, it is advisable to keep your assets in an offline wallet on your hard drive or even invest in a hardware wallet. This method is the safest way of holding your currencies, and it provides you with complete control over your assets.

Step 4: Calculate Your Gains and Losses

This makes it crucial to understand how to handle these transactions, especially if you’re an investor or a business accepting crypto as payment. Cryptocurrencies represent both opportunities and challenges for modern businesses. As Fractional CFOs and their bookkeepers navigate these complexities, it’s essential to establish robust accounting practices that align with current regulations while preparing for potential future changes. To cover tax liabilities resulting from cryptocurrency transactions, it’s wise to convert some cryptocurrency holdings to cash. Since the CRA doesn’t accept cryptocurrencies for tax payments, having liquid assets available is crucial. CFOs must plan these conversions strategically to minimize the impact on the company’s liquidity.

How to Automate Financial Reports The Easy Way

• Since 2014, the Internal Revenue Service (IRS) has treated cryptocurrencies like Bitcoin, Ethereum, and Solana as property rather than currency.
• Not all cryptocurrency is treated equally; there are different types of assets which are used in different ways.
• In June of 2021, the FASB issued an invitation to comment where interested parties can voice their opinion regarding its upcoming technical agenda.
• The SEC indicated that such exclusions might constitute “individually tailored” measures, which are generally prohibited.
• And just like with stocks, it’s crucial for you to keep track of these gains and losses for tax purposes.
• I’m sharing tales from the trenches of over a decade of finance experience from Fortune 100 companies to spirited startups.

Further, its actions also directly influence crypto markets, which has been witnessed by market observers whenever Fed Chair Jerome Powell and President Donald Trump meet. As cryptocurrencies gain mainstream traction, proper crypto tax reporting is becoming increasingly complex. Whether you only dabble with $100 bucks worth of Bitcoin or actively swing trade an Ethereum fortune, accurately reporting crypto activity isn’t optional. And even if the convoluted reporting process irks you, ain’t no use grumbling over what you can’t change, ya know? The government moves slower than a snail when adopting to new technology so expecting straightforward crypto tax guidance is wishful thinking. Unfortunately, only unrealized losses, not gains, get recorded in the United States.

But before resting on our laurels, it pays to learn about recent cryptocurrency tax policy changes so you avoid tripping any legal tripwires. Hats off to you if you manually maintain impeccable crypto records that satisfy an ornery IRS auditor. But for most mere mortals, keeping accurate documentation requires leveraging robust tracking tools that rip open the crypto accounting black box once and for all. Begin monitoring crypto activity now like a hawk so your records stay neatly organized from the get-go.

Understanding Accounts Receivable (Definition and Examples)

Rates vary based on the holding period—short-term gains are taxed at ordinary income rates, while long-term gains benefit from reduced rates. For that reason, using crypto for regular transactions requires carefully recording each transaction and compiling that information to correctly account for impairments and gains. So companies need accounting processes in place to track crypto assets, their cost basis, how long they have been held, any impairment, and any transaction fees. If your company is using cryptocurrency for payments, it should be stored in a separate wallet from crypto assets that are being held to appreciate in value. From an accounting standpoint, a company’s crypto holdings could confuse investors looking at balance sheets. Companies can, however, provide disclosures if they feel they need to explain any issues to investors.

Existing Accounting Standards For Cryptocurrency

Failing to report these transactions can lead to penalties and interest charges from tax authorities. As your cryptocurrency portfolio grows, you may find yourself managing multiple wallets and different types of digital assets. It’s essential to keep track of all your wallet addresses, private keys, and the respective cryptocurrency holdings in each wallet.